Snowflake Stock: Likely to Melt Before Soaring Again

© Reuters. Snowflake Stock: Likely to Melt Before Soaring Again

Solid quarterly results released late last month have helped Snowflake (SNOW) stock get back on an upwards trajectory. Renewed interest in tech stocks has also given a boost to the data cloud services provider's shares.

That said, a pullback may be on the horizon. Why? Even as Snowflake's underlying business grows at a rapid rate, at today’s valuation, this growth is more than accounted for in the stock price.

As long as it continues to grow at an above-average clip, it’s doubtful that shares will fall to value stock territory. However, if markets correct in the coming months? It may fall to a price that’s more reasonable, based on its long-term growth projections. (See SNOW stock charts on TipRanks)

In short, I’m neutral on the stock right now, given that the near-term risk of a change in market sentiment outweighs the chance of it going back to its all-time high of $429 per share.

SNOW Stock and its Recent Strong Earnings

As seen in its latest quarterly earnings results (released on August 25), Snowflake continues to beat expectations. Revenues for its fiscal second quarter (ending July 31) soared 104% year-over-year, to $272.2 million. This was above sell-side estimates calling for $256.5 million in revenue.

Losses for the company came in lower than expected. It even upped its guidance for the full fiscal year (ending January 2022). These quarterly results were well-received by the market in general, as well as the sell-side community.

Analysts who were bullish on the stock, despite its rich valuation, increased their price targets, thanks to the strong results. The most bullish was FBN Securities’ Shebly Seyrafi, who raised his price target from $350 to $375 per share.

For the most part though, valuation worries are weighing on the sell-side’s sentiment. The average analyst price target (more below) is basically at current trading levels.

Does that mean shares will hold steady from here? Not exactly. A gradual move higher may be in the cards, if markets remain strong. Yet, as correction fears loom, investors should expect some sort of correction or pullback instead.

Market Changes, Not Results, Will Knock Snowflake Back Down

SNOW's rate of expansion will slow down at some point, but that’s not happening anytime soon.

Between increased demand from its existing customer base, untapped markets like services to the U.S. government, as well as a long growth runway in markets outside of the U.S., Snowflake appears primed to continue growing at above-average levels through the rest of the decade.

With this, chances are it won’t be underwhelming results that knock SNOW stock back down to lower prices. Instead, it’ll be changes in market conditions.

What could cause this? One possible driver could be the U.S. Federal Reserve’s planned tapering of its bond purchase program, which has helped encourage investment in stocks. If the outbreak of COVID-19’s Delta variant worsens, this could cause turmoil for the market as well.

Such an outcome could affect richly priced tech growth stocks like this one the hardest. Trading for 83.6x its estimated sales for this fiscal year, its valuation could contract in a big way, while continuing to reflect on its long-term growth potential.

Wall Street's Take

According to TipRanks, SNOW stock has a consensus rating of Moderate Buy. Out of 19 analyst ratings, nine rate it a Buy, 10 rate it a Hold, and none rate it a Sell.

The average Snowflake price target is $313.47, implying 1.6% downside potential. Analyst price targets range from a low of $275 per share, to a high of $375 per share.

Staying Neutral Best Move for Now

The risk of a market downturn makes Snowflake shares seem unappealing at today’s prices. That’s not necessarily a call to avoid it completely, though.

The company has plenty of place to keep growing at an above-average pace. It may just well hit its aggressive annual product revenue target of $10 billion by 2029.

The issue today, though, is that SNOW stock is more likely to fall due to meltdown, than to continue to gradually move to higher prices.

Disclosure: At the time of publication, Thomas Niel did not have a position in any of the securities mentioned in this article.

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